Ahmed Butt is a partner in Simmons & Simmons’ Riyadh and Dubai offices. He specialises in project finance, contract finance and real estate finance. He has advised regional and international project and contractor financiers on both conventional and sharia-compliant transactions in the Middle East, Africa and Pakistan, and advised on prestigious projects such as the International Finance Corporation’s US$1 billion Global Trade Liquidity Program and US$1 billion syndicated ijara facility for the government of Dubai, Department of Civil Aviation.
Adrian Nizzola is a partner in Simmons & Simmons’ London office and previously in the firm’s Abu Dhabi office from 2010 to 2016. He has over 30 years’ experience in the oil and gas industry, advising international clients particularly those based in the Middle East and Africa. He was general counsel to Qatar Petroleum (QP), its affiliates and subsidiaries, and to other Qatari entities for over 17 years and continues to advise QP and the State of Qatar. Adrian’s recent experience includes advising Mitsubishi Corporation and TEPCO as sponsors on the US$ 3billion 2,400MW/130MIGD Facility D independent water and power project in Qatar and advising the government of Kenya on its Early Oil Pilot Scheme and crude pipeline project to Lamu Port.
Leonie Sellers is an associate in Simmons & Simmons’ Dubai office. Leonie has a particular focus on energy and infrastructure having advised clients both domestically and internationally in various industries, including developers, contractors and employers. Leonie has significant experience in the power, renewable and general infrastructure sector, and is familiar with various standard forms of contracts, including FIDIC, numerous bespoke EPC and government contracts, and various forms of concession arrangements.
“Owing to the increased demand for the supply of power and water, 2017 saw the financial close of various power and water projects in the Middle East.”
GTDT: What have been the trends over the past year or so in terms of deal activity in the project finance sector in your jurisdiction?
Ahmed Butt: One of the main trends over the last year continues to be the focus on oil prices. Considering the significant pressure placed on the major oil producers in the region in previous years (with Iran, Iraq, Kuwait, Saudi Arabia and the UAE reportedly all running a fiscal deficit in 2016), 2017 was hoped to be a turning point. Unfortunately, while 2017 saw an improvement in both the average oil price and the fiscal deficits, neither were as substantial as some initially envisaged.
Knock-on effects continued to be seen in the local project finance market, including the general tightening in local liquidity, with the Saudi Arabian banking sector being particularly affected. The trend began in 2015, continuing into 2016 and while the liquidity conditions improved in 2017, profitability reportedly declined, reflecting the rising impairment charges and funding costs.
Interest rates again continued to rise through 2017. For example, the overnight Emirates Interbank Lending Rate (EIBOR) rose from an average of 0.218 in January 2016 to 0.509 in January 2017, reaching 1.17 in January 2018. In Saudi Arabia, the three-month Saudi Interbank Offered Rate (SIBOR) rose from 1.333 in December 2015 to 2.041 in December 2016 and dropped slightly to 1.87 in December 2017. This continues to translate into higher interest rates, shorter tenors and reduced debt-to-equity ratios on offer from lenders.
With market reports stating that project finance figures fell by three-quarters from 2016, the local project finance market remained relatively robust in 2017 for well-structured deals in traditional sectors such as energy.
Leonie Sellers: Renewable energy has continued to be a focus of the Gulf Cooperation Council (GCC). The UAE has previously targeted 44 per cent of its power to be derived from renewables by 2050, and in September 2017 Dubai took landmark steps towards this by announcing plans to implement the world’s largest concentrated solar power project, which is set to generate 700MW of power when completed. With Saudi Arabia’s National Renewable Energy Program committing to generating 9.5GW of renewable energy capacity by 2023, Saudi Arabia has also looked to a future of clean energy and 2017 saw the initiation of the country’s first solar power project, with financial close expected shortly.
Saudi Arabia’s Vision 2030 and National Transformation Program continue to transition the Saudi economy away from overreliance on oil revenues and towards more private sector involvement. The highly anticipated initial public offering of shares in state-owned Saudi Aramco, expected for the second half of 2018, is a move that is likely to make the company the most valuable listed company in the world.
GTDT: In terms of project finance transactions, which industry sectors have been the most active and what have been the most significant deals to close in your jurisdiction?
AB: While loans for project finance fell 14 per cent to US$230 billion in 2017, we have continued to see significant project activity in the energy and infrastructure sectors. GCC populations continue rapidly to expand, placing increased demands on critical infrastructure such as transportation, public housing, healthcare and education facilities.
LS: Owing to the increased demand for the supply of power and water, 2017 saw the financial close of various power and water projects in the Middle East. These included three solar photovoltaic (PV) power projects in Egypt totalling US$190 million, 75 per cent of which is financed through non-recourse project debt; a water desalination expansion project in Saudi Arabia reportedly financed for US$325 million; a 50MW solar PV plant for which loans totalling US$54 million were issued; and Phase 3 of Dubai Electricity and Water Authority’s (DEWA) Mohammed bin Rashid Al Maktoum Solar Park, which became the largest renewable energy project in the Middle East to receive sharia-compliant financing.
Adrian Nizzola: The market has also continued to evidence an increased willingness by governments to fund projects through public–private partnerships (PPPs) as the public sector alone can no longer independently fund the necessary infrastructure development.
Kuwait and the Emirate of Dubai published PPP laws in recent years, with Oman and Qatar having announced that they are in the process of drafting their own PPP laws. In addition, Saudi Arabia is also thought to be drafting its own PPP laws, following the establishment of the National Centre for Privatisation in 2017. On this basis, we expect to see a continued commitment to PPPs in the GCC and to see further significant projects in the future as PPP models become increasingly sophisticated and robust.
GTDT: Which project sponsors have been most active in driving activity? Which banks have been most active in providing debt finance?
AN: Local, regional and international sponsors and banks have been active in investing in and lending in relation to GCC projects.
Japan’s Sumitomo Mitsui Financial Group retained its title as the leading project finance arranger in 2017. The top five regional sponsors by deal value were Abu Dhabi National Oil Company (ADNOC), Delek Group, Abu Dhabi Water & Electricity Authority (ADWEA), YTL and Guangdong Yudean Group.
More generally, ACWA Power remains a very active sponsor in the GCC energy market in terms of deal volume, with Saudi Binladin Group remaining as one of the most active GCC sponsors in the Saudi market in terms of the value of contracts under execution. The Al-Shoula consortium, Saudi Aramco, SABIC and Saudi Electricity Company are also very active.
In terms of international sponsors, South Korean sponsors (such as Daelim, SK E&C, Samsung Engineering and Doosan Heavy Industries & Construction) continue to dominate the Saudi market followed by Spanish and Italian sponsors.
In the UAE, local sponsors such as Mubadala, Masdar, IPIC and many of the government-related entities such as ADNOC, ADWEA and DEWA dominate the local sponsors or UAE-headquartered joint ventures list.
In Qatar, the likes of Qatar Petroleum (QP), Kahramma and Qatar Electricity & Water Company continue to lead the local sponsor list.
In terms of international lenders, HSBC, International Finance Corporation, BNP Paribas, Société Générale, Standard Chartered Bank and Deutsche Bank remain very active in the GCC.
AB: As for GCC lenders, Riyad Bank remains one of the biggest project lenders in the GCC, with local banks in the UAE, such as Emirates NBD, First Abu Dhabi Bank and Dubai Islamic Bank also remaining very prominent and winning key roles.
In Saudi Arabia, the top local project finance lenders include Banque Saudi Fransi (Crédit Agricole’s local operation), National Commercial Bank, the Saudi British Bank (SABB – HSBC’s local operation), Riyad Bank and Arab National Bank.
The top international project finance lenders in Saudi Arabia continue to include Crédit Agricole, Société Générale, Standard Chartered Bank and KfW. Nevertheless, US dollar lending remains on the decline largely driven by the sophistication of the local banks and the country’s need for riyal-funded projects.
In Jordan and Egypt, international sponsors such as First Solar International, SunEdison and ACWA Power continue to be very active. In terms of banks, development finance institutions such as the IFC, EIB and EBRD remain very active on a number of development and renewable projects.
“Successful government sponsors are becoming more aggressive by pushing for uncommercial terms, which has led to a number of transactions being delayed.”
GTDT: What are the biggest challenges that your clients face when implementing projects in your jurisdiction?
AN: The ability to secure and maintain long-term true ‘project finance’ (ie, fully non-recourse) remains challenging.
Loans granted by regional and foreign banks to provide PPP infrastructure financing have been significant in recent years. This remains largely owing to the government’s willingness to back these loans. However, the global liquidity issues as discussed previously have meant that the credit markets have lost their appetite for long-term project finance deals. For some time, tight credit conditions caused certain leading banks to invoke ‘material adverse change’ exit clauses, seeking to walk away from deals that have become less viable.
As a result, banks continue to become increasingly selective with the projects that they will fund and are seeking risk-sharing arrangements that will satisfy all parties. Such risk-sharing arrangements include short-term lending with guarantees from the project sponsors as well as revenue guarantees from governments. This means that to secure financing, sponsors are increasingly reaching out to governments to secure sovereign guarantees or putting their own balance sheets at risk by deviating from fully non-recourse project finance schemes.
AB: With dependence on external funding for the development of essential infrastructure, GCC governments are becoming receptive to the commercial realities facing banks and sponsors alike and are increasingly willing to grant sovereign guarantees and, in some cases, to make favourable secured offtake commitments in concession agreements in order to secure financing and ensure bankability.
Other key challenges include:
- sovereigns now seek to cap their exposure and liabilities (for example when providing government guarantees) in respect of projects they are sponsoring, which has not been well received by international banks and, in particular, the export credit agencies;
- successful government sponsors are becoming more aggressive by pushing for uncommercial terms, which has led to a number of transactions being delayed (for example, delay and cost overrun risk being passed to the bidder);
- significant bottlenecks continue to delay projects in obtaining regulatory approvals – building or construction permits and environmental impact assessment approvals being the most noteworthy;
- international and local banks and international sponsors imposing compliance with Western-style codes of conduct and practices, including compliance with
- Equator Principles, FCPA, OFAC and the UK Bribery Act;
- delays in being able to move equipment through ports and securing labour force in some jurisdictions – an issue that has resulted in calls for introducing a GCC initiative to facilitate freedom of movement for equipment and labour force;
- enforcement of foreign judgments, particularly in jurisdictions that have not put in place clearly defined laws and regulations to give effect to this; and
- the inability to create certain types of liens on certain type of assets (such as a general fixed and floating charges over future assets or even a share pledge in certain jurisdictions), which then necessitates introducing heavily structured alternative security structures.
GTDT: Are there any proposed legal or regulatory changes that may give rise to new opportunities in project development and finance? Do you believe these changes will open the market up to a broader range of participants?
LS: PPPs continue to be considered as a way to finance large-scale development projects in the Middle East, particularly in the energy and infrastructure sectors.
Kuwait and Oman continue to drive infrastructure projects under their respective
PPP regimes, with Kuwait announcing the US$1.3 billion development of the new Al Hayman wastewater treatment plant, and Oman reportedly executing PPP projects valued at US$2 billion.
However, it is Saudi Arabia that is dominating the PPP landscape in the Middle East, with a reported US$42.9 billion in planned PPPs. PPPs form a crucial component of the country’s National Transformation Programme, with 18 PPP projects currently in the pipeline.
Ranging from the energy to the infrastructure sector, the PPPs tendered in 2017 include the Hail Regional Airport, the Qassim International Airport, Taif International Airport and the Yanbu Red Sea coast independent water project (IWP).
The PPPs will be executed under Saudi Arabia’s newly established National Centre for Privatisation; however, there still remains a lack of a formal legal and regulatory framework. While the current investment level appears to show investors have so far not been deterred by this, to maintain this level of development the country may benefit from the increased investor confidence that a clear PPP legal regime can attract.
AB: As mentioned above, many countries in the GCC have recently developed or are considering developing their own PPP legislation. Such PPP laws will help overcome the significant barriers to the broader adoption of PPP in the GCC.
That being said, many PPP projects have been and continue to be successfully executed in the absence of dedicated PPP laws.
PPP laws enhance investor confidence by, among other things:
- establishing a clear legal basis for a project by eliminating the potential for conflicting laws and legislation;
- establishing clear procurement rules and procedures – transparent eligibility criteria reassures potential bidders that they may have a reasonable chance of winning the bid;
- requiring the relevant authority to carry out an analysis of the economic benefits of the project’s technical and economic feasibility, prior to tendering a project, giving confidence to investors that the government is not going to pull out of the project half way through the tendering process as the government has thoroughly considered the need for the project prior to tendering; and
- regulating how project agreement disputes are settled and allowing for waivers of sovereign immunity. A significant area of concern for investors is the enforceability of contracts against the government. Investors will usually require certainty that foreign judgments and arbitral awards given in accordance with a PPP agreement won’t be litigated again in the courts of the host country.
In some GCC countries, a number of initiatives were introduced requiring the use of local SMEs in respect of project developments particularly for local content. While this is a welcome step towards stimulating local economies, a number of concerns have been raised by project sponsors, including delays in the procurement process and general issues relating to meeting international best standards.
“Many PPP projects have been and continue to be successfully executed in the absence of dedicated PPP laws.”
GTDT: What trends have you been seeing in terms of range of project participants? What factors have influenced negotiations on commercial terms and risk allocation? Are there any particularly innovative features?
AN: Project finance in the region is becoming more complex as more diverse sources of funding are required for many projects.
In terms of the traditional banking market financing, global banks that have historically been active participants in the GCC project finance market and over the preceding years have reduced lending owing to their internal credit, liquidity and capital adequacy issues. Although global banks are still involved, there is an increased reliance on credit and financial support from local and regional banks.
International regulatory standards on bank capital adequacy, stress testing and market liquidity risk have reduced the willingness of many banks, both local and international, to allocate capital for project finance. The commercial banking sector’s overall appetite to take and hold large project loan assets has reduced. Capacity and capital adequacy issues remain. Accordingly, with banks no longer able and willing to do all the heavy lifting on project financing, sponsors continue to be faced with increased pressure to generate project finance in a variety of forms.
LS: Specialist energy and infrastructure funds, private-equity firms and institutional investors remain increasingly active as alternative private sector capital. Policy banks, multilateral government agencies and export credit agencies are also playing an increased role in direct lending. For major projects, however, export credit agencies will continue to play a significant role.
AB: The government has also established specialised credit institutions in Saudi Arabia, comprising of the Agricultural Development Fund, the Saudi Credit and Saving Bank, the Real Estate Investment Fund and the Public Investment Fund, which provide loans to the agricultural, industrial and real estate sectors, as well as small and medium-sized enterprises.
Private sector investors continue to look to the capital markets to obtain additional and cheaper sources of financing and to reduce dependence on bank loans. One avenue for entering capital markets is to raise funds in capital markets through sale of corporate bonds or sukuk (a path that PPPs can also take, with the project company issuing bonds or sukuk).
GTDT: What are the major changes in activity levels or new trends you anticipate over the next year or so?
LS: Throughout 2018 we expect to see extensive investment in the renewable sector. It has been reported that the Middle East requires a capital investment of around US$30 billion to US$40 billion to meet its 2035 renewable energy targets. It is expected that solar will account for the majority of the renewable capacity, with the cost of solar power reportedly falling by almost three-quarters since 2010. It is envisaged that the solar projects will use limited or non-recourse debt financing, with Saudi Arabian banks in particular showing a significant interest in the new renewable projects.
AB: We also expect to see a continued trend in the GCC of the execution of projects by way of PPP. In Saudi Arabia alone, 2018 has already seen the tendering of the Jeddah and Makkah schools project, the Shuqaiq 3 Red Sea coast IWP and the Rabigh 3 IWP project.
It is also expected that there will be a growing number of infrastructure refurbishment projects as assets built in the early to mid-2000s continue to need upgrading, with a number of the early IPP/IWPPs in Oman and Abu Dhabi already nearing the end of their original 20-year concession terms.
Qatar 2022 and Dubai Expo 2020 should also drive a number of project finance deals. In Qatar, we expect to see a major shift to implementation phases after many years of planning for development projects.
AN: Finally, with Saudi Aramco’s highly anticipated public offering set for the second half of 2018, we expect to see Saudi Arabia’s continued transition from an overreliance on oil revenues towards more private sector involvement.
The Inside Track
What three things should a client consider when choosing counsel for a complex
Local regional knowledge, depth of PPP and project finance experience (both acting for lenders and borrowers) and negotiation skills.
What are the most important factors for a client to consider and address to successfully implement a project in your country?
An understanding and appreciation of local law and culture is imperative when structuring and executing projects in the GCC, particularly through PPPs. Given our 20 years in the region, presence in the UAE, Qatar and Saudi Arabia, and multilingual capabilities, we are well placed to assist our clients in this regard.
What was the most noteworthy deal that you have worked on recently and what features were of key interest?
We advised International Finance Corporation (IFC), European Bank for Reconstruction and Development, Commercial International Bank (Egypt) SAE as the lenders in connection with the project financing of a bulk liquids terminal and jetty for the import and storage of gasoil and liquefied petroleum gas, liquefied natural gas (LNG) and berthing of LNG floating storage regasification units at Ain Sokhna, Egypt developed by Sonker Bunkering Company. The project, strategically located on the Red Sea Coast near the Suez Canal, is an important step in plans for the Suez Canal to become a global logistics hub.
We advised the lenders on the original project financing which reached financial close in summer 2017 and, most recently, we advised on amendments to the finance documents to bring in additional financing by way of an IFC B Loan participation.
Ahmed Butt, Adrian Nizzola and Leonie Sellers
Simmons & Simmons LLP
Dubai, London and Riyadh